Interaction between New Zealand and the EU on environment increased substantially in 2007 when New Zealand was in the process of designing a national Emissions Trading Scheme (ETS). The EU had implemented its ETS, the largest multi-national scheme in the world and the central pillar of EU climate policy, in 2005. Policy officials from New Zealand cooperated closely with their EU counterparts as they designed the New Zealand scheme.
314 Ibid.
315 The three projects are: Te Apiti Wind Farm in conjunction with the Netherlands; Tararua Wind Farm Stage II, with France; and Awapuni LFG to Energy Project, with Austria. Ministry for the Environment, Notice of Approval of Track One Joint Implementation Projects by the New Zealand Government (Ministry for the Environment, 2008 [cited December 23 2008]).
5.3.1 EU ETS Background
The EU was initially reluctant to adopt emissions trading (ET) as a climate change policy tool, but as has been documented by Damro and Méndes,316 and by Loren Cass,317 throughout the course of the Kyoto Protocol they gradually came to accept ET as it was promoted particularly by the US but more accurately by the JUSSCANZ group,318 or Umbrella group as it came to be known. A former Ministry for Environment policy adviser and lead negotiator on the Kyoto Protocol from 1996 to 2002, stated that JUSSCANZ advocated for emission trading from the very beginning, based on the cap-and-trade scheme implemented in the US to reduce sulphur dioxide (SO2) emissions. He further pointed out that some of the earliest literature on emissions trading in a climate change context was written by New Zealand, in particular papers produced by New Zealand within the Umbrella Group.319 In contrast, European resistance to emissions trading was based on greater experience with, and therefore a natural preference for, regulatory controls. The idea of selling the right to pollute was met with much scepticism, and the EU argued that reductions ought to occur domestically, portraying the mechanism as “an American attempt to buy its way out of reducing domestic emissions.”320 However, gradually, the benefits of a least cost approach to emissions reduction became clear and from 1998 the EU began to embrace ET.321
The “Green Paper on Greenhouse Gas Emissions Trading in the EU” was published in March 2000, making the case for an EU-wide scheme as the most efficient instrument available to
316 Damro and Méndes, "Emissions Trading at Kyoto: From EU Resistance to Union Innovation."
317 Loren Cass, "Norm Entrapment and Preference Change: The Evolution of the European Union Position on International Emissions Trading," Global Environmental Politics 5, no. 2 (2005).
318 JUSSCANZ is a negotiating bloc of industrialised countries comprising Japan, the United States,
Switzerland, Canada, Australia, Norway and New Zealand. UN negotiations are divided into blocs. The Western Europea and Other group (WEOG) is further divided into EU and JUSSCANNZ. Later, in the context of the Kyoto Protocol it was referred to as the Umbrella Group as it came to also include Russia and Iceland.
319 Former Ministry for the Environment Policy Adviser, "Interview with Author."
320 Cass, "Norm Entrapment and Preference Change: The Evolution of the European Union Position on International Emissions Trading," 46.
321 Ibid.: 39.
ensure the EU meets its Kyoto Protocol commitments.322 Under the Kyoto Protocol, the 15 countries which were EU member states at the time of signing have a common target, set out in a burden sharing agreement and sometimes referred to as the “EU bubble” and must reduce their greenhouse gas emissions by 8 % below 1990 levels during the 2008–12 Kyoto commitment period. The member states that acceded later have individual targets outside the
„bubble‟.323
In October 2001, the European Commission put forward a formal proposal for a framework directive for the EU to implement an emissions trading scheme. Schreurs and Tiberghien suggest that this may have also been an attempt, albeit unsuccessful, to bring the US back into the Kyoto process, given the US preference throughout negotiations for market-based mechanisms.324
The EU commenced operation of its emissions trading scheme (ETS) in January 2005, according to Directive 2003/87/EC, which entered into force on 25 October 2003.325 It will allow the EU to meet its Kyoto obligations at a cost of 0.1% of GDP.326
The goal of the EU ETS was to create incentives for industries to reduce carbon emissions and to encourage investment in less carbon-intensive technologies and services by putting a price on carbon and exploiting the variations in abatements costs of participating installations. The EU scheme is particularly targeted at the energy sector and the actual industrial installations emitting greenhouse gasses. It covers 40% of EU greenhouse gas
322 Raimund Bleischwitza, Katrin Fuhrmannb, and Elias Huchlerc, The Sustainability Impact of the EU Emissions Trading System on the European Industry (College of Europe, 2007 [cited November 14 2008]);
available from http://www.coleurop.be/eco/publications.htm.
323 Ibid.
324 Schreurs and Tiberghien, "Multi-Level Reinforcement: Explaining European Union Leadership in Climate Change Mitigation," 35.
325 European Commission, Emission Trading Scheme (EU ETS) (DG Environment, [cited 11 November 2008]); available from http://ec.europa.eu/environment/climat/emission/index_en.htm.
326 European Commission, "EU Action against Climate Change: EU Emissions Trading: An Open System Promoting Global Innovation," ed. DG Environment (European Commission, 2007).
emissions and almost half of its carbon emissions, comprising approximately 10,000 large installations in the energy sector. It does not, for example, cover household emissions.327
5.3.2 EU ETS Issues
Current key design features of the scheme in phases 1 and 2 are that it targets stationary energy and industrial processes and concerns CO2 only. It works on a „cap-and-trade‟ basis - a fixed number of units are allocated to each member state based on factors such as Kyoto Protocol reduction obligations and GDP, then these are allocated by the state to affected domestic instillations in annual NAPs (National Allocation Plans). If a company uses more than its allowed amount of CO2, it must purchase additional units. If it uses less, it may sell the surplus. Each installation must monitor and report its carbon emissions, and must pay for those emissions using carbon allowances. Each allowance is equal to one tonne of carbon emitted. Installations that fail to meet their reporting and carbon emission payment obligations are fined. 328 It is currently in its second phase which runs from 1 January 2008 to 31 December 2012.
After its first phase (1 January 2005 – 31 December 2007) it was already apparent that there were serious problems with the design of the scheme.329
One of the major issues to be addressed is the allocation of emissions allowances.
Allowances are allocated freely, the idea being to gradually reduce the number of allowances given so that installations are gradually pushed towards emissions reductions.
It is now clear that allocation in the first phase was overly generous. Allocations were based on industry projections of how many units they would need. Although the aim was to ease
327 Emissions Trading Group Policy Adviser, "Interview with Author," (Wellington: 29 August 2008).
328 European Commission, "EU Action against Climate Change: EU Emissions Trading: An Open System Promoting Global Innovation," 12.
329 Karsten Neuhoff et al., The Role of Auctions for Emissions Trading (Climate Strategies, 2008 [cited Novemeber 10 2008]); available from http://www.climatestrategies.org/our-research/category/17/77.html.
industry into the scheme, the result was an over allocation of units and a substantial fall in the market value of carbon units.
In particular, the experience of the first phases has shown that in the electricity sector, a number of companies made large windfall profits through free allocation. This is because although allocation of units is free, companies face either a cost or an opportunity cost by holding units. A large number of electricity companies in particular passed their opportunity cost on to consumers in the first phase by raising their prices.330
A number of changes have been proposed for Phase III of the EU scheme based on initial experiences. In January 2008, the European Commission issued a draft directive outlining potential alterations to the structure of the scheme. It proposes expanding the scope of the scheme to include carbon dioxide emissions from petrochemicals, ammonia and aluminium, as well as nitrous oxide emissions from the production of nitric, adipic and glyoxalic acid, and perfluorocompounds emissions from the aluminium sector.331 It advocates for the use of auctioning to distribute allowances, as this is consistent with the polluter pays principle, estimating that initially in 2013 (the first year of Phase III) two thirds of allowances will be distributed via auctioning, a proportion of the revenues from which would be used towards measures related to emissions reduction and climate change adaptation. This would do away with the previous system of NAPs.332
The review also mentions the possibility of including carbon emissions from shipping, and refers to the inclusion of aviation emissions in the ETS. Ultimately, the EC hope for the ETS
330 Emissions Trading Group Policy Adviser, "Interview with Author." Bleischwitza, Fuhrmannb, and Huchlerc, The Sustainability Impact of the EU Emissions Trading System on the European Industry.
331 European Commission, "Proposal for a Directive of the European Parliament and Council Amending Directive 2003/87/EC So as to Improve and Extend the Greenhouse Gas Emission Allowance Trading System of the Community," (2008), 4.
332 Ibid., 8-9.
to eventually include emissions from aviation, maritime transport and forestry.333 Having received final approval from the Council of the European Union in October 2008 and thus sealed into law,334 domestic aviation will be included from 2011 and, controversially, international aviation will be brought into the scheme from 2012, meaning all flights landing or departing from Europe will have to participate.
Although emissions from aviation represent a small percentage of total GHG emissions, it is the fastest growing source of emissions. Total EU GHG emissions fell 3% between 1990 and 2003, while emissions resulting from aviation increased 70% in the same period.335 Further, the impact of emissions from aviation is greater due to the effect of high altitude.336
The inclusion of international aviation emissions in the EU ETS will of course significantly affect all airlines flying to and from Europe.337 This is a particularly sensitive issue for New Zealand, as it would mean considerable extra costs for Air New Zealand, in which the New Zealand government owns a 76.07% stake,338 as well as for travellers to and from the EU.
The increased cost of long distance flights in and out of the EU has the potential to negatively affect tourism to New Zealand. In addition to the obvious economic ramifications that this move represents, New Zealand, along with countries like Australia and the United States, is strongly opposed to this inclusion based on a number of other points. Firstly, that it is arguably contrary to the Chicago Convention establishing the International Civil Aviation Organisation (ICAO), according to which a signatory cannot unilaterally impose charges on
333 Stavros Dimas, "EU Climate Change Policy," in Speech delivered to Conference of National Parliaments of the EU and the European Parliament (London - House of Commons: 2005).
334 International Air Transport Association, I.A.T.A Blasts European Union ETS Decision (2008 [cited 18 November 2008]); available from http://www.iata.org/pressroom/pr/2008-10-24-02.htm.
335 European Commission, Aviation and Climate Change (2008 [cited 18 November 2008]); available from http://ec.europa.eu/environment/climat/aviation_en.htm.
336 Dr Christian N. Jardine, "Calculating the Environmental Impact of Aviation Emissions," (Environmental Change Institute, Oxford University Centre for the Environment, 2005).
337 Ward and James, "Energy Sector: Issues, Options and Perspectives," 196.
338 Air New Zealand, Shares on Issue (2009 [cited 13 January 2009]); available from http://www.airnewzealand.co.nz/aboutus/corporateprofile/shares_on_issue/default.htm.
civil, scheduled aircraft entering its territory (Article 15); and secondly, it raises questions of extra-territorial jurisdiction, which is also contrary to the Chicago Convention (Article 1).
The practical ramifications of the inclusion of international aviation are still not clearly elaborated. For example, it has been suggested that the scheme will avoid „double counting‟, as outlined by David Batchelor, Aviation Safety and Environment Policy Officer for the European Commission‟s DG Energy and Transport. He stated that where another state has an ETS in place covering aviation emissions, flights from that state to the EU would fall under the EU scheme, while flights from the EU to that state would be covered by that state‟s scheme.339
The EU argues that the ETS is fully compliant with ICAO regulations and the Chicago Convention. They argue that it is not unilateral as three other non-EU countries are involved – Lichtenstein, Norway and Iceland – and that they intend for it to become multilateral, and further, that it is not a tax or a charge as set out in Article 15 of the Chicago Convention.340 Aviation emissions are not covered by the Kyoto Protocol, but will likely be brought into the post-2012 framework to be decided at Copenhagen in December 2009.341 One can only speculate as to the motivations of the EU in venturing into such controversial territory, but it seems possible that the EU has grown frustrated with the lack of action and therefore results from ICAO in the 12 years that it has been charged by the UNFCCC with managing aviation emissions, as it has struggled to meet expectations in this area, resulting in increasing pressure from the UNFCCC as emissions from international aviation have trended upwards.
With a functioning trading scheme already well established, the EU likely believes it is well placed to implement initial measures aiming to curb the rapidly rising emissions in this
339 E.U States Likely to Face Legal Action from the U.S over E.T.S Regardless of Who Wins Presidential Election, Says A.T.A (GreenAirOnline.com, 2008 [cited November 18 2008]); available from
http://www.greenaironline.com/news.php?viewStory=245.
340 Ibid.
341 Reuters, ICAO Presses on with Global Emissions Trading Plan (2009); available from http://www.guardian.co.uk/business/feedarticle/8267860.
sector. Internationally, legal challenges on the grounds of the Chicago Convention are likely to come from the United States, Australia and the International Air Transport Association (IATA).342
In January 2008 the EU announced that it had no immediate plans to bring maritime emissions into the scheme, preferring to wait and see how International Maritime Organisation (IMO) managed efforts develop.343 However, later that year a report was commissioned on maritime emissions, and it is expected to include a recommendation on including maritime emissions in the ETS.344 Avril Doyle, European Parliament Rapporteur on the ETS stated in July of 2008 that she wanted shipping emissions included in the scheme no later than 2015.345
5.3.3 New Zealand – EU interaction on Emissions Trading
New Zealand and the EU have interacted closely with regard to the design and implementation of New Zealand‟s emissions trading scheme. Several policy officials interviewed over the course of this research between July and November 2008 agreed that most interaction between the EU and NZ on environment was on emissions trading, with most of the activity occurring between May and September 2007, leading up to the release of the Government‟s ETS framework, but with ongoing consultation and communication occurring as the framework was debated and further details clarified.
New Zealand ETS background
When New Zealand initially signed the Kyoto Protocol, policy officials believed that it would be a net exporter of carbon credits with a surplus of 33 million tonnes. This was one of the main arguments in favour of ratifying the Protocol. However, in 2005 when figures on the
342 Emissions Trading Group Policy Adviser, "Interview with Author."
343 Brussels Spares Shipping — for Now. (Dow Jones Factiva, 2008 [cited 15 January 2009]).
344 Emissions Trading Group Policy Adviser, "Interview with Author."
345 Shipping Industry Set for Co2 Index by 2009 (Dow Jones Factiva, 2008 [cited 15 January 2009]).
impact of transport and exhaust emissions and the contribution of carbon sinks were revised it was clear that New Zealand would actually face a deficit of 36 million tonnes in meeting its Kyoto reduction obligations.346
As outlined above, emissions reductions in New Zealand are particularly challenging. New Zealand already uses a high proportion of renewable energies in electricity generation (approximately 70%), and reducing emissions from transport is very difficult. Further complicating New Zealand‟s position is the unusually high proportion of methane and nitrous oxide in its emissions profile – almost 50% of total emissions – primarily as a result of the large agricultural sector.347 Despite New Zealand contributing approximately only 0.3% of all global emissions, per capita emissions are amongst the highest in the world. A recent report by the Worldwide Fund for Nature (WWF) ranked New Zealand sixth globally behind United Arab Emirates, the United States, Kuwait, Denmark and Australia.348
New Zealand has been a long standing proponent of emission trading as a policy tool to reduce emissions of greenhouse gasses, based on a preference for a least-cost and flexible approach. In 2001 and 2002, prior to the EU scheme‟s adoption, an emissions trading scheme was seriously considered by the Labour government as part of a package of climate change policy measures. Consultation on this proposal took place, with the resulting policy proposal put forward by the Labour Government favouring a capped carbon tax on energy, industrial and transport emissions over emissions trading. It included provision for large industrial
346 Brian Fallow, "Kyoto Bill Creates $1 Billion Deficit " The New Zealand Herald, June 17 2005.
347 Ward and James, "Energy Sector: Issues, Options and Perspectives," 187-93.
348 Worldwide Fund for Nature, Media Releases : Living Planet Report Reveals New Zealanders Have 6th Largest Footprint (Worldwide Fund for Nature, 2008 [cited December 5 2008]); available from
http://www.wwf.org.nz/index.php/about_us/media_releases/entry/living_planet_report_reveals_new_zealanders _have_6th_largest_footprint/.
emitters concerned about the impact on their competitiveness to negotiate individual terms (Negotiated Greenhouse Agreements).349
Later, the government also proposed a levy on methane and nitrous oxide emissions to fund research into the reduction of these primarily agriculture based emissions. However, due to considerable public and political pressure, both of these initiatives were eventually dropped, with the planned carbon tax officially abandoned in late 2005 after the general election.350
An alternative package of measures was needed to ensure New Zealand would be able to account for its Kyoto deficit. Emissions trading had always been a part of the long term plan of New Zealand‟s climate change strategy and as already described, had advocated strongly for emissions trading throughout the Kyoto negotiations. Five discussion documents351 were released a year later in December 2006, with a range of proposals including, among others, emissions trading, a narrow based carbon charge, incentives, subsidies and voluntary measures. After consultation and discussion with public and industry stakeholders, an emissions trading scheme was decided upon as one of the government‟s preferred policy options and this was announced in October 2007.352 A Senior Ministry for the Environment adviser explained that an emissions trading scheme would likely have always been „Plan B,‟
349 Ministry for Environment Policy Adviser, "Interview with Author.", Ministry for the Environment, History of Climate Change Policy Development (Ministry for the Environment, 2009 [cited 15 January 2009]); available from http://www.mfe.govt.nz/issues/climate/policies-initiatives/history/index.html.
350 Buhrs and Christoff, "„Greening the Antipodes‟? Environmental Policy and Politics in Australia and New Zealand," 229.
351 These were released by the Ministries for Economic Development, Environment, Agriculture and Fisheries.
The five documents were: Sustainable Land Management and Climate Change, Transitional Measures for Low Emission Electricity, Draft Powering our Future, Draft New Zealand Energy Strategy, and the New Zealand Energy Efficiency and Conservation Strategy. Ministry for the Environment, Consultation (Ministry for the Environment, 2009 [cited January 15 2009]); available from
http://www.mfe.govt.nz/issues/climate/consultation/index.html.
352 Frazer Lindstrom, New Zealand Climate Change Policy 2006+ (Frazer Lindstrom, 2006 [cited 5 December
352 Frazer Lindstrom, New Zealand Climate Change Policy 2006+ (Frazer Lindstrom, 2006 [cited 5 December